Juggling Dynamite

After denying it for months, Goldman Sachs alumnus cum Treasury Secretary Steve Mnuchin is finally admitting that their proposed tax reform will give tax cuts to the wealthiest Americans and–horror of horrors, threat of all threats–“a failure to pass such legislation could meaningfully hurt stocks”.  (Look Steve, stocks are due for a thumping, no matter what you self-proclaimed wizards push through).  In a recent interview on the “Politico Money” podcast, he also offered an “absolute guarantee” that Trump will sign a tax bill before year’s end…

Bernie Sanders calls out millions of dollars in campaign contributions from the second richest family in America–the Kochs–in exchange for passing a budget that cuts the Kochs’ taxes by over one trillion dollars. Here is a direct video link.

See also: Koch-funded ‘Fueling US Forward’ website shuts down, but Koch attacks on clean energy continue

As the stock market parties like it’s early 2000, a historically reliable indicator of economic weakness, the yield curve, continues to raise alarm in North America.  The spread between 2 and 10 -year US Treasury yields reached a new cycle low of .75 this week, and in Canada .51.

As show below in my partner Cory Venable’s chart since 1975, when these spreads reach zero, a recession is underway or close at hand.

In the present extraordinary cycle though, with central banks so aggressively influencing both ultra-low short-term yields, as well as longer term rates with QT (quantitative tapering), the question is whether a classic inversion of the curve will happen this time, or whether something close to zero may be close enough (for hand grenades).

One thing for sure, the timer is running down on this expansion cycle, and it’s never a question of if, but only when, the next recession and bear market arrives. They’re overdue. Who’s prepared?

We watched the recently released film Tulip Fever last night.  The main plot focuses on two pretty sexy love stories, but the more interesting backdrop is the speculative mania that swept Holland in the 1600’s known as Tulip Mania.  Here is a direct link to the trailer.

The episode is described as one of the first recorded speculative bubbles in Charles Mackay’s famous, must-read book Extraordinary Popular Delusions and the Madness of Crowds (1841).   The contract prices for bulbs of the then recently introduced tulip, reached extraordinarily high levels before collapsing in February 1637.  As shown on the left, at the peak of the madness, one bulb of rare varieties traded for 10x what a skilled craftsman could earn in 10+ years of work.  At one point, 12 acres of farm land were pledged for just one bulb.  (More recently, it has been argued that the scale of the mania was not as far-reaching as Mackay and others have reported.  Yet the frantic trading of rare bulbs at exorbitant prices that ultimately collapsed, is undisputed).

The story is classic human behavior and well worth revisiting.  Especially as the world is now in the midst of what will undoubtedly also be recorded as one of the greatest and most damaging financial bubbles in history.

Of course, you could, if starving, eat tulip bulbs.  Pieces of paper and digital entries representing ‘ownership’ in grossly inflated securities on the other hand–not even edible.